After a brief pause, Caterpillar Inc. (NYSE:CAT) shares are once again ripping higher. Thanks for the day’s gains lies in large part with fellow heavy equipment stock, Deere & Company (NYSE:DE), which is soaring on the heels of better-than-expected earnings. The overnight gap has pole-vaulted DE stock to a new all-time high north of $100.
Click to Enlarge
While it may be a bit late to chase DE stock for short-term traders, CAT is just now breaking out of a bull flag setup. Flag patterns materialize following sharp price increases.
The downward sloping channel allows the stock to digest recent gains while working off overbought conditions.
Patient traders wait for the flag to finish waving before jumping aboard. Today’s 2% jump in CAT stocks officially completes the flag while signaling the next advance is upon us.
Caterpillar stock remains well off its all-time highs ($116.95), but there isn’t much resistance between here and $106. Moreover, I expect the century mark to act as a magnet heading into year-end.
And really, a lift to $100 is all we need to generate solid returns using option contracts. In fact, with the following option spread we should be able to double our money.
CAT Stock Call Spreads for BIG Profits
With the election now fading in the distance and a sleepy holiday season staring us in the face, option premiums have receded across the board. And that means calls and puts can be snatched-up on the cheap.
If you think CAT stock can rally above $100 by January expiration, buy the Jan $95/$100 call spread.
The vertical spread consists of buying to open the Jan 95 call while selling to open the Jan $100 call for a net debit of $2.15. The max risk is limited to the initial $2.17 cost and will be forfeited if CAT sits below $95 at expiration.
The max reward is limited to the distance between strikes minus the net debit, or $2.83, and will be captured if Caterpillar rises above $100.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.
